State-funded venture capital programs provide investment capital to create and grow start-ups, early-stage and mid-stage businesses, often in one of two forms: (1) a state-run venture capital fund (which may include other private investors) that invests directly in businesses or (2) a fund-of-funds, which is a fund that invests in other venture capital funds that in turn invest in individual businesses. Many factors, particularly resources and available talent, inform a state’s decision on which form to choose.
Seven years have passed since State Small Business Credit Initiative (SSBCI) was created through the Small Business Jobs Act of 2010. The SSBCI aims to support and aid capital funding for new and starting businesses to boost economic recovery after the Great Recession. The Treasury Department awarded almost $1.5 billion to agencies in 47 states, the District of Columbia, five US Territories, and municipalities in three states. Funds were awarded in proportion to their unemployment rate against the national unemployment rate.
State-funded venture capital programs are specifically designed to address the funding issues local startups face. They also address local financial gaps by sharing risks with community banks, community development financial institutions, regional banks and equity investors.
SSBCI created five different programs which include: capital access program, collateral support program, loan guarantee program, loan participation program, and the venture capital program.
Venture capital program (VCP) funds provide capital to startups and new businesses through investment or by buying ownership or shares. It has two forms: the state-funded venture capital in which the government (or other private investors) invests directly to businesses; and a fund of funds, that invests in other venture capital funds that in turn will invest in individual businesses.
VCPs are also presented in to which stage did the SSBCI started funding a business. In the 967 investments in the VCP, more than three-fourths or 85 percent are at pre-seed (which is at 13 percent), seed (which is at 22 percent), and early stage (which is at 45 percent). This data is provided to SSBCI by 23 states.
Venture capital programs are also managed by organizations categorized to funds, state-sponsored entities, co-investment models and state agencies. These categories attracted different co-investors which are mostly angel investors and in-state venture funds.
States such as in Arkansas, Hawaii, Indiana and Missouri were the ones with the biggest number of VCP investments. Out of more than 1,600 total investments supported by SSBCI VCP, 610 were from these states, accounting for one-third of the total. This is an achievement for the venture capital program for directing dollars and investment to these states other than California, New York and Massachusetts. Reportedly, 75 percent of US venture capital went to these three states in 2016. Other successful programs include Ohio’s Innovation Fund and California’s CalSEED Fund.
In the $1.5 billion fund, 30 percent is allocated to VCPs, amounting to more than $400 million and 70 percent of which was expended. Equity investors piqued interest in the venture capital program, with $4.2 billion subsequent new financing compared to the expended 70 percent amounting to $327 million, achieving the highest in all of the programs.
VCPs also have a high leverage ratio of 12.76:1 strengthen by a subsequent private financing of more than $2 billion.
SSBCI also reported that the program supported more than 240,000 jobs, 24,000 of which are from VCPs.
The SSBCI program, according to the Treasury Department is a “one-time program with limited duration” and ended in September of 2017. There are still no reports nor government efforts about the program’s restitution. However, that does not mean that the state-funded venture capital funds are going to disappear. Most will continue to operate, investing in local startups.
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